At 4:30 AM UK December Services PMI (exp 59.5, prev 59.8) At 5:00 AM Eurozone November Retail Sales m/m (exp 0.5%, prev 0.3%) November Eurozone Unemployment Rate (exp 7.6%, prev 7.7%) Eurozone December Consumer Confidence (exp –7, prev –7) Eurozone November PPI m/m (exp 0.1%, prev 0.0%) At 7:00 AM Canada December Net Employment Change (exp 16.5k, prev 22.4k) Canada December Unemployment Rate (exp 6.3%, prev 6.3%) At 8:30 AM US December Non-Farm Payrolls (exp 113k, prev 132k) US December Unemployment Rate (exp 4.5%, prev 4.5%) At 10:00 AM Canada December Ivey PMI

The greenback continues to creep higher against the majors, firming to 8-month highs against its Canadian namesake and remaining stronger versus the euro and sterling. A combination of improving economic fundamentals and declining oil prices have contributed to the dollar’s gains versus the Loonie, which climbed near the 1.18-level at 1.1775, it’s highest since April 2006.

The closely anticipated December US labor report is due out at 8:30 AM, with expectations for non-farm payrolls seen declining to 113k from 132k. Recall earlier in the week, the release of the ADP private sector payrolls report, which posted a 40k decline for December, triggered a knee-jerk reaction lower in the dollar. The unemployment rate meanwhile, is forecasted to remain unchanged from the previous month at 4.5%. Labor market activity will be closely scrutinized for dual purposes of gauging US economic health and inflationary pressure.

A tightening jobs market would underpin the soft landing scenario, but would also suggest increasing wage pressure – thereby keeping the Fed on hold for greater duration. However, if there is evidence of spillover from deteriorating housing and manufacturing sectors, coupled with further easing in commodity prices, the Fed’s timeline for policy easing may be accelerated, which would ultimately weigh on the dollar.

BoJ Rate Hike Speculation Prompts Profit Taking

Rumors about the heightened possibility for a 25-bp rate hike from the Bank of Japan when it meets next week triggered a bout of profit taking in the carry trades, bouncing off record-lows against the euro and multi-year lows versus the sterling. A report from a Japanese newspaper earlier in the week suggested the BoJ would mull over a rate hike in its January meeting, triggering sharp declines in Japanese government bonds, as the 10-year JGB dipped to its lowest level since October.

Euro Extends Slide

The euro came under renewed selling pressure against the yen and dollar over recent sessions. From a fundamental perspective, we continue to favor a stronger euro given the backdrop of improving Eurozone economic fundamentals and scope for additional monetary policy tightening from the ECB.

In the session ahead, traders will digest further economic reports from the Eurozone beginning with the release of November retail sales, unemployment, confidence surveys and producer price index.

Support for EURUSD starts at 1.3060, followed by 1.3030 and 1.30. Additional losses will encounter floors at 1.2960, backed by 1.2920 and 1.29. A move past the 1.31-figure will target 1.3130, followed by 1.3160 and 1.32. Subsequent ceilings are seen at 1.3240, followed by 1.3270 and 1.33.

The dollar strengthened across the board during the European session after the New Year's first U.S. key economic data, manufacturing ISM, came out strong enough to set a bullish tone for the currency and the Fed December policy meeting minutes released yesterday suggested upside inflation risk still exist. The euro fell from 1.3180 to below 1.31 versus the dollar, and the sterling dropped close to 1.94.

The dollars stayed firm against its major rivals as the data due today were basically in line with expectations. U.S. weekly initial claims rose from 317k to 329k. The non-manufacturing ISM declined slight from 58.9 a month earlier to 57.1 as expected. The factory orders rose 0.9% in November, reversing the 4.7% decline in the previous month but below the estimate of 1.3%.

The euro lost its ground after the euro zone CPI turned out to remain at a low level of 1.9%, below the European Central Bank's target rate of 2%. However, the market has already priced in another 25 basis point rate rise in the first quarter this year. While the euro zone economy continues to expand, the ECB is widely expected to lift interest rates further this year though the inflation indictor is not high enough due to the falling oil price.

Meanwhile, the Canadian dollar declined further after a report showed the industrial product prices was unchanged in November, far below the forecast for a 0.6% gain. The loonie reached a 10-month low at 1.7176 against the dollar.

The closely anticipated December US labor report is due out at 8:30 AM, with expectations for non-farm payrolls seen declining to 113k from 132k. Recall earlier in the week, the release of the ADP private sector payrolls report, which posted a 40k decline for December, triggered a knee-jerk reaction lower in the dollar. The unemployment rate meanwhile, is forecasted to remain unchanged from the previous month at 4.5%. Labor market activity will be closely scrutinized for dual purposes of gauging US economic health and inflationary pressure. A tightening jobs market would underpin the soft landing scenario, but would also suggest increasing wage pressure ¡V thereby keeping the Fed on hold for greater duration. However, if there is evidence of spillover from deteriorating housing and manufacturing sectors, coupled with further easing in commodity prices, the Fed's timeline for policy easing may be accelerated, which would ultimately weigh on the dollar.

EURUSD will face interim resistance at 1.31, followed by 1.3120and 1.3150. Additional ceilings will emerge at 1.3170, backed by 1.32. Support starts at 1.3080, backed by 1.3050, 1.3020 and 1.30. Subsequent floors are eyed at 1.2950.

USDJPY encounters interim resistance at 119.20, backed by 119.50 and 119.80. Subsequent ceilings will emerge at 120, followed by 120.50. On the downside, support begins at 119 and 118.70, followed by 118.50. Additional floors are eyed at 118.30, backed by and 118.

At 8:30 AM US Weekly Jobless Claims (exp n/a, prev 317k) Canada November Industrial Product Price m/m (exp 0.6%, prev –0.1%) At 10:00 AM US December Non-Manufacturing ISM (exp 57.0, prev 58.9) US November Factory Orders (exp 1.3%, prev –4.7%) US November ISM Prices Paid (exp 55.0, prev 55.6)

The dollar firmed against the euro and sterling overnight, edging up to 1.3090 versus the single currency and pushing the pound to the 1.94-figure. The major mover in the London session was the yen, as profit taking in the carry trades propped the currency off record lows against the euro – recovering back toward the 156-level while climbing to 231.58 versus the sterling. In spite of the corrective pullback, we maintain our bullish stance on carry trades given the outlook for global central bank policy.

Traders continue to reassess the FOMC’s policy stance given the backdrop of recent improving economic fundamentals. Yesterday’s stronger than expected manufacturing ISM above the key 50-level, in addition to recent improving housing data have provided support for the greenback on the scenario that the US economy is moving toward a soft landing, enabling the Fed to delay an easing of monetary policy until the second half of the year. The Fed’s primary focus has been upside risks to inflation; as such it will be interesting to see if the latest pullback in commodity and oil prices will be long lasting – thereby allowing the Fed to shift its focus toward stimulating growth rather than containing price pressures.

Later in the session, traders will look to December non-manufacturing ISM, November ISM prices paid and November factory orders. The non-manufacturing ISM figure is forecasted to ease to 57.0, down from the prior month at 58.9, while the prices paid index is seen down to 55.0 versus 55.6. Lastly, factory orders for November are seen reversing October’s 4.7% drop, climbing by 1.3%.

The sharp pullback in commodity prices has weighed on the Aussie and Loonie, with the latter dropping to its lowest level in 8-months against its US counterpart. Currency traders will continue to keep a close eye on oil prices since the latest move lower pushed crude oil beneath $60/barrel. OPEC is expected to reduce oil production by 500k barrels per day. It will be interesting to see if the proposed reduction will have any significant impact on price.

Euro Retreats Despite Upbeat Data

The euro continued to weaken versus the dollar, dipping beneath the 1.31-level in London trading. Economic data from the Eurozone continues to point toward recovery. Germany’s December services index climbed to 6-month high, exceeding forecasts to edge up to 57.6 from 56.8 in November. The jobs component however slipped to 53.5 from 54.6. Meanwhile, the Eurozone December services PMI undershot calls for a rise to 57.8, but still improved from the prior month to 57.2.

The euro hangs onto the 1.31-level, with losses targeting interim support at 1.3075, followed by 1.3030 and 1.30. Additional losses will encounter floors at 1.2960, backed by 1.2920 and 1.29. Resistance will start at 1.3130, followed by 1.3160 and 1.32. Subsequent ceilings are seen at 1.3240, followed by 1.3270 and 1.33.

The dollar rallied across the board after the first U.S. major economic report in the New Year came out stronger than expected, setting a stronger tone for the currency. The manufacturing ISM rose from 49.5 to 51.4, beating the forecast for 50. A reading of above 50 indicates the manufacturing activity is expanding.

However, the outlook for the currency was less certain in the morning after the ADP Employment Services report showed the private sector jobs unexpectedly declined 40K in December, its first decline since April 2003. This sets the stage for Friday¡¦s jobs report in which traders will try to assess the health of the US labor market.

The December FOMC meeting minutes released this afternoon said recent economic indicators provided mixed signals about strength of near term economic activity. The Fed indicated that there is considerable uncertainty on the pace and extent of slowing of core inflation, with inflationary risks remaining to the upside. The tight labor market is still seen as an upside risk to inflation. It added that the slowdown in the housing market has spilled over significantly into consumer spending. The dollar relinquished some of its earlier gains following the minutes while stocks reversed course, with the Dow losing ground on the session.

EURUSD will face interim resistance at 1.32, followed by 1.3230and 1.3250. Additional ceilings will emerge at 1.3280, backed by 1.33. Support starts at 1.3150, backed by 1.3120, 1.31 and 1.3070. Subsequent floors are eyed at 1.3050.


Yen Falls to Record Lows vs Euro

The yen fell to a record low at 158.03 versus the euro and a low at 234.82 against the sterling as carry trades continue to prevail.

USDJPY encounters interim resistance at 119.50, backed by 119.70 and 120. Subsequent ceilings will emerge at 120.30, followed by 120.50. On the downside, support begins at 119 and 118.70, followed by 118.50. Additional floors are eyed at 118.30, backed by and 118.

At 10:00 AM US December Manufacturing ISM (exp 50.0, prev 49.5) US November Construction Spending (exp –0.5%, prev –1.0%) At 2:00 PM FOMC December Meeting Minutes (exp n/a, prev n/a)

The US economy remains the primary focus among currency traders at the start of the New Year with the data calendar beginning in earnest on Wednesday. With US stock and bond markets closed on Tuesday in observance for a National Day of Mourning, the release of manufacturing ISM was postponed until today. The December report is expected to reveal an improvement in manufacturing activity back to the key 50-level -- which distinguishes between expansion and contraction, from last month, which contracted to 49.5. Meanwhile, construction spending for November is forecasted to improve slightly from the prior month’s 1.0% decline, slipping by 0.5%.

The dollar’s direction will largely continue to be dictated by sentiment over the direction of global interest rate differentials – which ultimately hinge on Fed policy and the US economy. Dollar bears anticipate the Fed will ease policy in Q1 as a result of further deterioration in both housing and manufacturing to the extent of spillover into other sectors of the economy. On the other side of that coin, if incoming economic data reveals a bottoming in the housing market, steady pickup in manufacturing and continued improving conditions in the labor market, a Fed rate cut would be delayed until the second half of the year – thereby providing support for the greenback.

The key highlight this week will be Friday’s jobs data. Earlier in the New York morning, the release of the ADP private sector payrolls report triggered a bout a dollar selling as the ADP report posted at sharp drop of 40k, its first decline in almost 4yrs. Nevertheless, it is worth pointing out that the ADP cannot be viewed as a close proxy to the government’s non-farm payrolls given prior disparity between the figures.

Firm Eurozone Data Supports Further ECB Hikes

An upbeat labor report from Germany bolstered hopes for additional policy tightening from the ECB. The number of unemployed posted its steepest drop in over 5 decades by 108k, exceeding calls for a decline of 50k. Meanwhile, the unemployment rate dipped beneath the 10%-level to 9.8% -- its best 2002. The rosy outlook for the Eurozone’s largest economy highlights the divergence between the economies and central bank policies of the Eurozone, US and Japan. Accordingly, traders pushed the euro/yen cross to a new record high above the 158-level given the anticipated outpacing of rate hikes the ECB will have over the BoJ. Barring any significant government jawboning, carry trades will continue to be the dominant and favored trade among speculators.

The euro relinquished some of its gains following a quiet Asian session with Japan closed for holiday. However, following a sharply lower ADP private sector payrolls report, the euro spiked higher against the dollar climbing off its lows from 1.3220. Above 1.32, we maintain our bullish stance in the EUR/USD pair with a retest of recent highs on the horizon. Interim resistance is seen at 1.33, followed by 1.3340 and 1.3370. Additional resistance is seen at 1.34, followed by 1.3450 and 1.35. On the downside, interim support starts at 1.3220, backed by 1.32 and 1.3180. Subsequent selling will target 1.3130, backed by 1.31 and 1.3070.

The euro rallies across the board in the first trading day of the New Year, while the dollar seems to stay in a weak tone with the Fed rate outlook remains unclear. The euro strengthened to a new record high at 157.87 versus the yen, and close to 1.33 against the dollar.

The European Central Bank is widely seen to lift rates from 3.5% to 3.75% in the first quarter of next year. The ECB board member Erkki Liikanen indicated today that interest rates in euro zone will rise, echoing several other ECB official¡¯s hawkish comments made recently. In contrast, the Fed may cut rates this year if a soft landing is not in sight after the release of key U.S. economic data early this year. A significant part of the market expects no movement in the Fed monetary policy next year.

The data from the euro zone this morning came out to be in line with the expectations, reinforcing the view that the ECB needs to keep raising rate to contain inflation. Germany manufacturing PMI rose from 58.3 to 59.4 in December, beating the forecast for 58.6. The manufacturing PMI for the Euro zone was almost unchanged at 56.5 in December, basically in line with the estimate of 56.8. The euro stays firm after these strong manufacturing data.

The yen remains weak across the board as the market are not sure about the chance of a Bank of Japan rate hike in January 2007. The BOJ policy meeting will be held on January 17-18.

The market is slow today as the U.S. stock market is closed to commemorate the death of former President Gerald Ford.

The market will focus on the U.S. manufacturing ISM and FOMC December meeting minutes due tomorrow.

EURUSD will face interim resistance at 1.33, followed by 1.3330and 1.3350. Additional ceilings will emerge at 1.3380, backed by 1.34. Support starts at 1.3250, backed by 1.3220, 1.32 and 1.3170. Subsequent floors are eyed at 1.3150.

USDJPY encounters interim resistance at 119, backed by 119.20 and 119.50. Subsequent ceilings will emerge at 119.80, followed by 120. On the downside, support begins at 118.50 and 118.30, followed by 118. Additional floors are eyed at 117.70, backed by and 117.50.